3/25/2019 Should I follow Warren Buffett's 90/10 investing strategy?

https://money.cnn.com/2018/02/21/retirement/warren-buffett-investing-strategy/index.html 1/6

New Rules for Retirement

Should I follow Warren Bu�ett's 90/10investing strategy?by Walter Updegrave   @CNNMoney

February 21, 2018: 10:42 AM ET

I'm in my early 50s, have more than $1 million in retirement savings and plan to retire around age60. I've heard about Warren Bu�ett's strategy of keeping 90% of one's assets in stocks and 10%in bonds and like the idea of investing my savings that way to earn higher returns. I know myaccounts would take a hit if stock prices fall, but I believe I could survive a market downturn. Doyou think this is a good strategy for retirees and near retirees?—C.P.

Anyone who's followed the strategy of putting 90% of their money in stocks and 10% in bondsthat Warren Bu�ett mentioned in his 2013 letter to Berkshire Hathaway shareholders — wouldhave done very well in recent years.

After all, since that missive was released in March 2014, stocks have returned nearly 60%, whilethe broad taxable bond market has returned just a bit over 8%. So clearly, investing nearly all ofyour retirement savings in equities has paid o�, whether you're still building a retirement nest eggor, for that matter, drawing on it for retirement income.

At the same time, though, you also have to wonder how anyone with such a stock-heavy assetallocation felt when the market went on its recent white-knuckle rollercoaster ride. Nor can youhelp but wonder how many people nearing or already in retirement would feel if the recentvolatility turns out to be the harbinger of a major meltdown in stock prices.

And therein lies what I believe is the major question anyone thinking of adopting this strategyneeds to resolve before adopting it: Will you be willing, and able, to stick with such an aggressivestocks-bonds mix when the markets are in turmoil or even in the midst of a harrowing tailspin?

Related: Where should you put your money if you think the market will crash?

Make no mistake, the benefits for hanging in with a very heavy stock allocation over the long runcan be substantial. During your career, stocks' generally higher long-term returns can help youbuild a much larger nest egg than you would by tilting your mix more toward bonds. And evenpost-career, when retirees are drawing money from their nest egg, the Bu�ett Portfolio has donequite well.

For example, when a finance professor at Spain's IESE Business School examined how a 90%stocks-10% bonds portfolio would have performed over 86 rolling 30-year periods between1900 and 2014 following the 4% rule — i.e., withdrawing 4% initially and then subsequentlyboosting withdrawals by the inflation rate — he found not only that the Bu�ett portfolio survivedalmost 98% of the time, but that it had a significantly higher balance after 30 years than moretraditional retirement portfolios with say, 50% or 60% invested in stocks. (The prof, by the way,also outlines a few tweaks to the Bu�ett strategy that may be able to help you improve on thoseresults.)

But the fact that this strategy succeeded so well in the past doesn't mean it will replicate thatsuccess in the future. And even if it does fare as well in the years ahead, there's still the matter ofhow someone investing his nest egg in such a volatile mix will deal with what I've called"emotions risk," or the risk that you'll give in to the powerful urge to sell stocks during severemarket setbacks, locking in losses and perhaps leaving you unprepared to participate in themarket's eventual recovery.

It's one thing to say now, with stock values still high even after recent turbulence, that you cansurvive a market downturn and that you're confident that you won't abandon the 90-10 strategy.

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3/25/2019 Should I follow Warren Buffett's 90/10 investing strategy?

https://money.cnn.com/2018/02/21/retirement/warren-buffett-investing-strategy/index.html 2/6

But the real issue is how you'll react if stocks go into a gut-wrenching and prolonged slump, likethe 17-month near 60% drop from the market's high in 2007 to its low in 2009 or the 31-month49% decline in the wake of the late '90s dot-com boom.

Maybe you look at such setbacks and are sure you would be able to handle them in the future.Fine. Just remember that, since you're looking backwards, you know when stocks hit bottom,when they turned around and how everything turned out. The impact of a bear market on aninvestor's emotions and psyche is quite di�erent when you're going through it in real time, whenstock prices are tumbling day after day, when rallies fizzle and lead to even bigger losses, whenthere's no end in sight and you see your hard-earned savings dwindling before your eyes. Duringsuch times many investors are desperate to do something, anything to ease the pain.

If you've got the discipline and the stomach to stick with a very aggressive portfolio even duringmarket cataclysms — or if your nest egg is so large relative to the amount of money you need todraw from it each year so your chances of running through your savings prematurely areminuscule — then maybe you're a candidate for the Bu�ett approach. But I suspect most peoplenearing retirement or already retired aren't looking to take their life's savings on a stomach-churning up and down ride.

And they don't have to. As long as you've been saving throughout your career and you continueto save, you don't need a nearly all-equities portfolio to build an adequate nest egg in the homestretch to retirement. If you've got 10 or so years until retirement, a more modest stock weightingin the neighborhood of 60% to 70%, or for that matter even a bit more conservative if you'reparticularly risk averse, should su�ce. (In fact, even if you're approaching retirement age with anest egg smaller than you'd like, there are better ways to improve your retirement prospects thanby taking on more investing risk, which could backfire and leave you worse o�.)

Related: 3 things you need to know about the 4% rule

Similarly, you don't need to overdo it when you're on the verge of retirement or have alreadyretired. As long as you keep your withdrawal rate reasonable, you don't need to load up heavilyon stocks to avoid outliving your savings. The study I referred to earlier showed that moretraditional retirement stocks-bonds allocations — 60%-40%, 50%-50% and 40%-60% — heldup about as well or better than a 90% stocks-10% bond portfolio, and a larger bond stake wouldhave provided more of a cushion during stock market setbacks. You can get a sense of how longa nest egg invested in di�erent mixes of stocks and bonds might last in the future at variouswithdrawal rates by going this retirement income calculator.

Of course, by investing less of your savings in stocks, you do limit the potential upside. But whenyou're nearing the end of your career or already retired, you have to ask yourself which makesmore sense: Shooting for higher returns while having to watch the value of your nest egg dip anddive so that you might (not will, but might) end up leaving a larger legacy to your (no doubtincredibly deserving) heirs? Or going with a more conservative strategy that should provide asmoother ride and allow you to enjoy retirement without worrying that a market setback willupend your retirement plans?

Obviously, the choice is yours. But I think that most retirees and near retirees would be willing togive up some upside in return for less drama and anxiety in their post-career life.

CNNMoney (New York)First published February 21, 2018: 10:42 AM ET

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